Budgeting is a process of managing your personal finances more efficiently, but with so many methods available, choosing the right one can be overwhelming. The good news is there’s a strategy that’s both effective and tailored to meet your unique needs. The pay-yourself-first budget method, for example, is a simple approach for focusing on savings and debt payments. In this article, we will explore why this approach is worth considering and how it can help you focus on saving and achieving your financial goals.
- The pay-yourself-first budget prioritizes savings, investments, and debt repayment before spending money on other bills or expenses.
- This budgeting strategy helps you build the habit of saving money and investing consistently.
- The pay-yourself-first budgeting style only works when you stick to the plan and avoid dipping into your savings for non-emergency expenses.
- Accompanying the pay-yourself-first budget with saving in high-yield accounts or investing in credible means will let you earn more on your periodic savings contributions.
What is a pay-yourself-first budget?
Pay-yourself-first budget is a personal financial management strategy that prioritizes saving, debt payment, and investing before spending money on other expenses. The idea is to allocate a portion of one’s income towards savings or investment accounts before paying bills or making payments. This ensures you’re saving consistently and reduces the risk of overspending even though you’re earning enough.
Technically, when you prioritize separating money to save, you pay for your goals and so you end up paying yourself as you have money saved up to meet those financial goals. This explains why it is called the “pay yourself first” budget. It is also referred to as a reverse budgeting strategy because unlike other budgeting methods where you cater to your expenses and then save whatever is left, the pay-yourself-first budget requires you to devote a huge chunk of your income to savings, after which the rest of the money can be used to cover expenses.
The amount you separate as savings can go into specified accounts. You could use it to pay a debt, direct the money into your retirement plan, save to invest in a credible means, or constantly dump it into a high-yield savings account where you earn monthly or annual interest. You may also have outlined what you are saving towards, such as a new car, house rent, or Christmas vacation.
Because saving tends to take a huge part of your income in this budgeting strategy, it is very ideal for those looking to achieve a financial goal very quickly. At the same time, it requires discipline and could demand you to miss out on certain indulgences such as eating out or frequent lifestyle shopping.
How does the pay-yourself-first budget work?
The pay-yourself-first budgeting strategy works in a similar fashion to the 50/30/20 and the 80/20 budgeting rules. In fact, some have classified them as types of the pay-yourself-first budget. You save a determined percentage that you have specified and then you have the rest to yourself to spend as you desire.
Step 1: Decide how much you want to save
How much you save will be totally up to you, but it should be a significant percentage of your income. Your savings goals are also yours to fine-tune as your situation demands. For example, you could choose to save 30% of your income so that you have 10% for debt payment, 10% for retirement, 5% for vacation funds, and 5% for emergency funds or investments. The remaining 70% would then be all yours to spend on all of your needs and wants.
It helps to look into what financial goals or debts you have and how long you have to get them done. If you have 5 months to fulfill a debt of $1,000 for example, that means you have about $200 to contribute to the debt payment in a month. Figure out what percentage of your income of $200 will be. That would amount to the percentage you separate for the dept payment every month.
Whether or not you have debts to pay or an end-of-the-year vacation to save towards, it is essential to save for important things like emergencies and retirement. They should therefore remain a constant you are saving towards and should take up a huge chunk of what you save.
Step 2: Decide how you would spend the rest of your income
Although the pay-yourself-first budget does not specify how exactly you should spend on your needs, wants, or other bills, it is only wise to be prudent and strategic with the spending, allocating funds appropriately and setting priorities so your remainder can really be enough and you don’t have to cheat your savings by removing from it to pay bills.
That said, having a budget is always important. Identify the constants you spend on and put them in categories. Review your bank and credit card statements and let how much you’ve spent on these categories in the previous months guide how much you allocate to them. Because a pretty significant percentage of your income is now being put out for savings, it is only expected that you have to be more prudent about how you spend so all the cash you have left can go around for necessities and wants.
Step 3: Ensure you stick to your savings goals
As far as the pay-yourself-first budget is concerned, you are truly fulfilling the point of the whole plan as long as you hit your savings goals. After you have listed out the various things you are saving for, consider creating separate accounts for them if you’ve not already done so. With these accounts, you can direct automatic transfers to them from your income account so you don’t have to worry about forgetting to separate your savings or being tempted to spend them.
Discipline plays a key role in effective budgeting, and you must always remember this. You could strategically set your automation to coincide with when you’re paid so you don’t have any opportunity to “swindle” the money.
Advantages and Limitations of the pay-yourself-first budget
- It is easy to utilize
- It is a quick and highly-effective way for saving money
- You could automate your savings so it accrues in another account automatically.
- It provides what to fall back on during emergencies
- The knowledge of having sufficient savings stacked up will help you live a less stress-filled life even during an economic crisis or other incidents like job loss.
- This budget plan can end up eating up your monthly spending necessities such as grocery shopping and fun hangouts.
- It is not the ideal budgeting plan for those whose income is barely enough to foot their major bills. If you fall into this category, however, it is a huge sign that you should seek a better source(s) of income.
- Without discipline, it could lead to extravagant spending if you have too much left after deducting your savings.
What should you do if you do not have enough to save
Perhaps, you are currently living from paycheck-to-paycheck that it is impossible to save and still have enough to foot your bills unless you take a debt. In that case, the pay-yourself-first budget may not be the ideal budgeting strategy for you yet. Nevertheless, you can still take control of your finances using other budgeting methods like values-based or envelope budgeting. Although these budgeting strategies may not be able to squeeze out what to save for you, they can help you ensure you are truly managing your income, albeit small.
While you do this, you should consider actively searching for a better job, getting a second job, starting a business, or embarking on any other side hustle. Taking debts may not be the best for you as they stress you mentally and never really solve the underlying problem. So while you are in the job-hunting process, stay true to the budgeting strategy you are working with. The disciple you build will eventually help you when you have enough to stash up as savings.
Each budgeting method serves its purpose and caters to unique individual needs. The pay-yourself-first strategy is a tried and tested approach that helps you prioritize saving so you can easily take control of your finances and reach your financial goals. While putting savings on the forefront can be hard at first, by starting small and staying consistent, you will watch your savings grow steadily and find it easier to achieve things you put on your bucket list.